4 Signs You Should Say 'No' to a VC

Minda Zetlin is a business technology writer and speaker, co-author of The Geek Gap, and former president of the American Society of Journalists and Authors. Like this post? Sign up here for a once-a-week email and you'll never miss her columns.

Investor Brad Feld and entrepreneur Rajat Bhargava have worked together on seven start-ups over the last 18 years.

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In this sluggish economy, many company founders are happy to get funding--from anywhere. They're scared to ask too many questions lest they frighten the funding away.

That's the wrong attitude, say Brad Feld and Rajat Bhargava. Bhargava is a serial entrepreneur; Feld is managing director of venture capital firm Foundry Group, and the two have collaborated on seven start-ups over the past 18 years. Six of them are still going strong as public companies, private companies, or within larger firms that acquired them. The newest is MobileDay, an app that gives smartphone users one-click access to conference calls, where Bhargava is co-founder.

"There's been a power shift in information," Feld says (in a MobileDay-powered conference call). In the past, he explains, VCs would do their "due diligence" research on a prospective start-up, but the start-up founders would have limited options for researching VCs. "Today, it's easy to get access to people who've worked with an investor and firm, and there's an enormous amount of info available about many investors."

Don't be shy about asking questions, he adds. "The mistake a lot of entrepreneurs make is that they're too tame because they don't want to scare off an investor. But the best investors love questions. They want to do more than just write you a check."

Of course, every VC in the world will say he or she wants to be your partner and advisor and not just a source of funds. Yet as Friendster founder Jonathan Abrams learned, sometimes having a VC can do more harm than good. How can you tell a VC might be wrong for your business? Watch for these warning signs:

1. The VC isn't fascinated with your product.

Well before giving you money, the VC should be helping you brainstorm your product, asking questions and coming up with ideas--and using it if possible. For instance, Feld was experimenting with MobileDay for six months before he funded it, and another Foundry start-up recently implemented something it calls "The Brad Feld Feature" because it came from one of his suggestions.

Before investing in MakerBot which makes 3D printers, Feld went online and spent $1,200 to purchase one, and then spent a weekend setting it up. "This was before having any substantive conversations with the founders," he says. In fact, their first conversations came from tech support questions. "It developed from there."

If your product isn't getting this kind of interest from a VC, chances are you should move on.

2. He (or she)'s just not that into you.

If the VC loves your product, but doesn't seem interested in getting to know you personally, that's not a good sign either. "If they just focus on the people and ignore the product, you've got a problem. If they focus on the product and ignore the people, you've got a problem," Feld says. "I can't think of a single company I'm investing in where I don't also enjoy spending time with the entrepreneur."

You need a deep personal relationship to build the kind of trust that will sustain you over the hard times, he adds. "Businesses fail, and people disappoint each other. If you just have a business relationship, you won't develop the trust that will take it to the next level."

3. You can't be completely honest.

"The important thing is to be completely transparent," Bhargava says. "It's very, very difficult to be transparent about your business, but it goes a long way toward building that relationship. 'Here's what I'm going through; here's what I'm struggling with; here's what I need help with.' You have to know if that will spook the investor or if they'll want to dig in and help you."

That ability to be honest was a great asset in Feld and Bhargava's relationship when they worked together on Interliant, the only one of their ventures that did not survive. After some politicking by a different executive, Feld removed a part of the company's operations from Bhargava's oversight. Bhargava took a few days to calm down, but then he explained forthrightly how disappointed he was and why he believed Feld had made the wrong decision. "Being open and directly confronting the issues, you get through it," Bhargava says now. "I felt hurt, but I think our relationship is that much stronger."

As for Feld, he recalls returning to his hotel after discussing the matter over dinner and feeling physically ill. "I knew I had completely screwed up," he says.

4. The VC doesn't treat you like an equal.

"The idea that people always come to my office and present to me is distasteful," Feld says. Of course, he adds, people do frequently make presentations at Foundry Group offices, because it's most convenient, or because it allows them to meet other Foundry team members. But he's just as likely to go visit their start-ups instead.

"I want to go to their environment and see how they configure their world," he says. "It's part of building that personal relationship."